During times of economic hardship, crime rates tend to increase. Ordinarily, one would expect an increase in crime to manifest itself in crimes against people, crimes against property, and/or auto theft. Even if you have not been personally victimized, you may know someone — perhaps in the community or professional arena — who has been preyed upon.
It is important to emphasize that one of the largest increases in a certain type of crime makes each of us a victim and robs each of our households of several hundred dollars per year. Police reports are seldom made about this particular crime, and it rarely makes the evening news. It is insurance fraud.
The insurance industry consists of more than 7,000 companies collecting more than $1 trillion in premiums each year. Naturally, this makes a very attractive target for those with a propensity toward criminal activity. However, when unemployment rates and home foreclosures surge, it creates an enticing opportunity for even the most honest, law-abiding American who happens to have a good automobile and/or homeowner's insurance policy.
Evans & Dixon reports that it has seen a marked increase in the number of suspicious insurance claims in the last 12 to 18 months. The St. Louis, Missouri law firm has noticed a hike in claims involving suspicious fires in homes set for foreclosure; mysterious disappearances of valuable jewelry; theft and/or fires in automobiles with GAP insurance; and grossly overstated claims for loss of personal content items in connection with otherwise legitimate burglary losses.
The Federal Bureau of Investigation (FBI) estimates that the total cost of non-healthcare-related insurance fraud is more than $40 billion per year. Not surprisingly, this figure is not absorbed by the insurance industry as loss of profits. Instead, each of us offset these losses at an approximate average household cost of $400 to $700 per year in increased premiums. This means that it is more important now than in earlier times for claim representatives to be vigilant in the investigation of first-party insurance claims to ensure that fraudulent and/or overstated claims are denied.
Many states have enacted laws to protect insurers against fraudulent insurance claims, including classifying insurance fraud as a crime and passing immunity statutes for both arson and auto theft. Many states have also organized insurance fraud task forces.
When confronted with a first-party claim, an insurer owes a duty to its insured to fully and fairly investigate the matter. It is commonly held that failure to do so is bad faith.
While investigations of first-party insurance claims where arson or fraud are suspected tend to be adversarial, insurers have an interest in protecting themselves against fraudulent claims. There is no dispute that such claims must be investigated thoroughly before a coverage decision may be made.
In handling any first-party claim, an insurer has a duty to timely provide its insured with the necessary claim forms. Further, the insurer has a duty to provide its insured with instructions and reasonable assistance so that first-party claimants can comply with their policy conditions.
Initial correspondence to the insured should clearly and conspicuously reserve all rights and defenses under the policy and the law. All subsequent correspondence should clearly indicate that the carrier continues to reserve all such rights and defenses.
Once the initial claim forms have been provided, the insurer should communicate regularly with its insured. If the communication received from a claimant suggests that a response may be expected, then a timely response should be made.
For claims where arson and/or fraud are suspected, a complete investigation will likely take much longer than normal. In such cases, the insurer should remain in constant communication with its insured.
When arson and/or fraud are suspected, an examination under oath should be requested. An insured is required to submit to an examination under oath upon request pursuant to the loss conditions of the policy under which the claim is being presented. Subject matters to be explored in the examination under oath include any information that is deemed material to the claim investigation. Specifically, the insured's financial condition prior to the loss should be explored in great detail. Such information is useful in establishing whether or not the insured would have a motive to have caused a fire and/or fraudulently overstated, or completely falsified, a claim.
In addition to the fact that the insured must submit to an examination under oath (EUO), he or she must also produce requested documentation pursuant to the loss conditions of the insurance policy at issue. Documentation requested should include mortgage information, outstanding credit obligations, bank statements, and records pertaining to civil litigation and criminal histories.
Once the EUO has been completed, any necessary follow-up investigation should be completed in a timely manner. This may include conducting witness interviews, obtaining police and fire reports, contacting retail facilities to verify purchases, and contacting the producing insurance agent to determine if there were any increases in coverage prior to the report of loss.
Upon completion of the follow-up investigation, the company should be in a position to make a coverage decision. As long as the insurer has communicated regularly with its insured throughout the investigative process, it will be of no legal consequence that the adjustment process greatly exceeded that of an ordinary first-party insurance claim. In addition, if it appears, more likely than not, upon completion of the investigation that arson and/or fraud are at play, then the claim should be denied to protect against future increased premiums to a carrier's honest policy holders.
Interested in more fraud news and in-depth articles? Head over to Claims' investigative channel for more information.
At Evans & Dixon LLC, David W. Cooper is partner and Ellen Jean Brooke is an associate. Evans & Dixon offers legal coverage in the areas of labor and employment law, workers' compensation defense, medical malpractice, legal collections, arson and fraud litigation, and civil liability defense for employers, insurance companies, and the self-insured.
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